Don’t Trust Bitcoin Startups That Centralize Everything

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Peter Smith of Blockchain.info and Susan Athey of Stanford University took the stage at Disrupt NY to update everyone on the state of bitcoin. In the last few months, Mt.Gox collapsed, bitcoin has lost half of its value. Can bitcoin survive following the current reality check?

According to our two experts, bitcoin as a whole is here to stay. But Mt.Gox may have shown us that there is a wrong way of handling bitcoins — the Mt.Gox way.

“What Mt. Gox does bring up is the historical difference on philosophy about how startups use the bitcoin protocol,” Smith said. “There are two buckets — the first one is startups that centralize. When you send out bitcoins to Mt.Gox, they are moving that into a master account. Would I trust anyone with my bitcoins?”

If you go out and buy bitcoins on an exchange with centralized trust, you should immediately transfer these bitcoins to a service where you can manage public and private keys.

In the other bucket, you can find other companies, such as Blockchain, that provide software to more effectively and more securely manage your bitcoins. These bitcoin users manage their own public and private keys, meaning that you can’t break into a wallet if you don’t have the private key. And Smith is advocating for these kind of services. This philosophy is not surprising coming from Blockchain’s COO. But Athey agrees, as well.

“Consumers don’t have to keep large sums of money in these centralized services,” she said. “Mt.Gox had a couple of episodes of freezing withdrawals.” In other words, everybody should have anticipated Mt.Gox’s death.

Trading on centralized exchanges should remain a hobby, and you should be aware of the risks. If you just want to hold a few bitcoins, Smith offered some advice to limit risk as much as possible.

“If you go out and buy bitcoins on an exchange with centralized trust, you should immediately transfer these bitcoins to a service where you can manage public and private keys,” he said.

This whole idea of centralized trust is relatively unknown to non-tech-savvy people. On this front, there is a lot of work to do. Kim-Mai Cutler asked whether bitcoin startups should get together and create a bitcoin association.

“I was explaining to somebody backstage the difference between centralized services like Mt.Gox and services where you manage your own keys,” Smith said. “The industry as a whole can do a much better job. I’d like to see the Bitcoin Foundation take a more active role on this front. They’ve done a great job on money laundering. I’d like to see them do more work on consumer protection.”

The panel was also a good opportunity for a brief update on Blockchain, which is apparently doing really well. “People ask when are you going to raise money? We make money every single month,” Smith said. “We are a revenue-positive business. We manage a team of 20 people solely on that revenue stream.”

Finally, when the conversation moved to alternative coins, Smith also shared that he is bullish on dogecoins. “In terms of the alternative currencies that I like, I really like dogecoins. I got 3,600 dogecoins by selling an inflatable penguin,” he said.